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Globalisation and Changing Corporate Form
Gianmarco I.P. Ottaviano London School of Economics, U Bologna and CEPR
The Third CEPR-Modena Conference on Growth in Mature Economies:Revisiting the Contribution of Openness
11-12 May 2015
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‘Alien Invasion’: GVCs and BGs Global Value Chains (GVCs):
Networks of supply Input-output relations
Global Business Groups (GBGs): Networks of control Ownership relations
They are the ‘brains’ (GBGs) and ‘brawn’ (GVCs) of globalization
Yet, our understanding of their parallel and joint contributions to growth is still rather limited
For example, control chains are often unrelated to supply chains: Why?
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Global Value Chains (GVCs) Background:
Emergence of GVCs Vertically and geographically fragmented
production Trade in intermediate goods and tasks
UNCTAD (2013): Intra- and inter-firm GVCs of multinational
enterprises account for 80% of global trade GVCs are responsible for significant double-
counting in global trade figures GVCs make extensive use of both market and
internal services (~ BGs)
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CompNet and GVCs Gross flows of goods and services crossing
borders back and forth are hardly informative of value added (VA), factor income and factor content generated in a country
Direct impact on the assessment of the country’s ‘competitiveness’ (i.e. ability to generate VA, income, employment, ultimately welfare for its citizens)
Competitiveness Research Network (CompNet): all ESCB central banks plus international organisations interested in competitiveness issues
CompNet Interim Report (2013)
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CompNet and GVCs CompNet: comprehensive set of indicators to
assess integration of countries into GVCs and the implications for country performance
Research questions: What is the evidence on the importance of GVCs
in the euro area? Which firms take part in GVCs? Which countries are net gainers/losers from
participating in GVCs? What are the effects of GVCs on the
interdependencies between economies and external imbalances?
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CompNet: Europe and GVCs Identification and measurement of GVCs are
crucial for policy assessment, especially for highly integrated EU countries
Still much work to be done in: Disentangling VA in trade flows Measuring countries’ involvement in vertically
fragmented production Assessing countries’ position within value chains
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CompNet: Europe and GVCs The main statistical tool used in analysing GVCs
consists in global input-output tables But additional micro-level evidence needed as
strong assumptions are required for the construction of global input-output tables
CompNet uses data provided by the OECD-WTO initiative Trade in Value-Added (TiVA) and by the EU project World Input-Output Database (WIOD)
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CompNet: Disentangling Value Added Given high and growing import content of
exports, traditional trade statistics that record gross flows of goods and services each time they cross borders are increasingly uninformative of the actual VA generated in a country
For instance, in gross terms the main export partner of Germany is France, and for Italy and France it is Germany
However, in value added terms (according to OECD data) for all three major euro countries, the main export partner is the United States
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CompNet: Disentangling Value Added Based on the WIOD, Amador, Cappariello and
Stehrer (2013) report on euro area countries in 2000-2011: In 2011 foreign VA content of exports (reflecting
foreign inputs in the production of exports) averaged about 32%, with smaller countries generally exhibiting higher values
Some evidence of pro-cyclical pattern Evidence of growing engagement in GVCs for the
majority of the euro area countries, which regained momentum after the trade collapse of 2009
Imported VA share in exports of goods is higher than in exports of services, making the latter more important in VA terms
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Foreign VA in Euro Area Exports
Source: CompNet Interim Report (2013)
averagein 2011
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CompNet: Measuring Countries Involvement Import content of exports traditionally taken as
measure of countries’ involvement in GVCs This emphasizes foreign upstream suppliers but
countries also supply inputs to foreign downstream customers
Koopmans, Powers, Wang and Wei (2011) stress two dimensions: Use of foreign inputs for own exports (Foreign VA) Supply of intermediates for other countries’
exports (re-exported Domestic VA) European countries appear to be highly and
increasingly integrated into GVCs
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CompNet: Decomposition of VA
Source: CompNet Interim Report (2013)
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GVC Participation of Euro Countries
upstreamaveragein 2011
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CompNet: Assessing countries’ position ‘Upstream countries’ specialise in the production
of raw materials or intangibles necessary at the beginning of the value chain (e.g. research and design)
‘Downstream countries’ specialise in the assembly of final products or customer services
De Backer and Miroudot (2013) compute ‘upstreamness’ as ‘distance to final demand’: number of production stages (plants) a product goes through before reaching final demand
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CompNet: Assessing countries’ position Between 1995 and 2008:
Most euro countries managed to move upstream Only a few countries in Europe moved
downstream (Poland, Portugal, Romania, Slovakia and Slovenia)
General trend consistent with the overall increase in the length of GVCs and the emergence of outsourcing as outsourcing inherently increases the distance to final demand
More research needed to assess the pros and cons of ‘upstreamness’ for countries
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CompNet: Assessing countries’ position
Source: CompNet Interim Report (2013)
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ETLA: Who Captures Value in GVCs? Multinational companies vs. national
governments: Companies look at own global ability to capture
profits (only a component of total value added) at the corporate level: otherwise largely indifferent to the geographical distribution of value added
Governments look at the sum of value added captured within national borders (GDP): otherwise largely indifferent to the organizational distribution of value added
Increasingly divergent interests
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ETLA: Who Captures Value in GVCs? TiVA and WIOD still fall short of describing how
GVCs operate in practice and how their economic gains are distributed across countries
A recent report by ETLA (Ali-Yrkkö and Rouvinen, 2013) builds on 40 detailed case studies of individual products/services by firms residing in Finland to analyze those issues in finer detail
For instance: Impacts of re-locating assembly processes Consequences of multinational corporations’
internal transfer pricing practices
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ETLA: Value Capture in a Smartphone Snapshot: Nokia N95 (2007) Unbundled pre-tax retail price (VA): €546 VA by 600 components, software and
intellectual property VA by actors, functions, and geographies Depending on the input, 1-8 stages before the
final assembly by Nokia and 2-4 stages after it Assembly in two locations: Beijing (China) and
Salo (Finland) Countries of final sale (VA of distribution
arises in the country of final sale)
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ETLA: Value Capture in a SmartphoneA stylized supply chain of the Nokia N95
Source: Ali-Yrkkö, Rouvinen, Seppälä and Ylä-Anttila (2011)
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ETLA: Where Assembled Does (Not) MatterVA captured in Finland for Nokia N95: Beijing vs. Salo
Source: Ali-Yrkkö, Rouvinen, Seppälä and Ylä-Anttila (2011)
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ETLA: Value Capture in 3 Dumbphones Over time (last dumbphone: same year as Nokia
N95 smartphone): Nokia 3310 (2000, VA €78.60) Nokia 1100 (2003; VA €62.70) Nokia 1200 (2007, VA €27.00)
Analysis of these three similar phones over time shows: Rapid decline in price of a given feature set Gradual shift of tasks towards developing countries Shift concerns physical components and assembly as
well as design and other intangible aspects of the GVC
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ETLA: Company’s ViewpointVA shares by participant/function
Source: Seppälä and Ali-Yrkkö (2013)
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ETLA: Government’s ViewpointThe geography of VA
Source: Seppälä and Ali-Yrkkö (2013)
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ETLA: Company vs. Government Four electronics products by the same company:
Transfer pricing When parent company carries most of the risks and
owns all relevant intellectual property, it should capture any ‘excess profits’ (OECD, 2010)
According to this principle, the price that the parent company charged its sales subsidiaries was too low
Using more appropriate transfer prices increases the VA share of the home country by 42-66% depending on the product
This has direct consequences on measured GDP It also increases the exports of the home country and
the imports of the countries where the sales units are located
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ETLA: Transfer (Mis)PricingThe impact of incorrect transfer pricing on the value added captured in
Finland (average of four electronics products)
Source: Ali-Yrkkö (2013)
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ETLA: Value Creation and Capture
Source: Pajarinen, Rouvinen and Ylä-Anttila (2012)
‘Smile Curve’: VA per hour in different stages of GVC
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Summary on GVCs GVCs raise positive and normative issues for mature
economies: Involvement Positioning Value capture
Normative issues: companies’ and governments’ viewpoints do not coincide: GVCs are an inescapable opportunity for companies GVCs can be an elusive challenge for governments Corporate boundaries vs. national boundaries
Positive issues: Measurement still caught between I-O tables and case
studies: Need for large disaggregated datasets (~ next slides 29 and 30)
Conceptual framework still very unbalanced between ‘brains’ and ‘brawn’ (~ subsequent slides on GBGs)
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Trade Networks at Firm Level by Categories of Goods: Costa Rica and Japan
Source: Carballo, Ottaviano and Volpe Martinkus (2013)
Differentiated goods Homogeneous goods
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Trade Networks at Firm Level by Categories of Goods: Costa Rica and US
Source: Carballo, Ottaviano and Volpe Martinkus (2013)
Differentiated goods Homogeneous goods
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Global Business Groups (GBGs) By now GVCs are ‘familiar aliens’ GBGs instead remain ‘unfamiliar aliens’:
A commonly accepted definition of `business group' (BG) does not exist in the economic or business literature (Altomonte and Rungi, 2013)
“The economics literature has not had much to say about non-standard organizational forms [...] now much discussed in the business and organizational literatures, including joint ventures, strategic alliances, networks, business groups, clans, and virtual organizations” (Baker, Gibbons and Murphy, 2002)
Among these non-standard organizational forms business groups (BGs) stand out as essentially lacking any ‘economic theory’
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What is a Business Group? The lowest common denominator of alternative
views defines BGs as hybrid organizations of economic activities, halfway between markets and hierarchies, that: Exchange intermediate goods and services on the
market, but possibly through a transfer price Relocate financial resources across affiliates, but
at more favourable conditions if confronted with external financing (`internal capital market')
Coordinate management decisions through majority stakes in controlled assets, but have to consider as well minority shareholders’ protection
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What is a Business Group? (Cont.)
More generally, BGs exhibit a flexible form of asset ownership that: Provides incentives to self-enforce promises of
cooperation among affiliates, given the control exerted by a common parent
But enjoys the freedom of organizing activities within a market-like environment, as each affiliate maintains formal property rights on its production assets
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A Working Definition of BG Define a BG as:
A set of at least two legally autonomous firms Whose economic activity is coordinated through
some form of hierarchical control via equity stakes Legal autonomy and hierarchy jointly characterize
BGs, distinguishing them from: ‘Independent firms’, as these are legally
autonomous but operate without impending hierarchies
‘Multidivisional firms’, as these are organized in a hierarchy of branches without autonomous legal status
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The Pervasiveness of BGs
According to this definition, BGs are ubiquitous and impactful (Altomonte and Rungi, 2013): Most of the Fortune 500 companies, the top 2,000
R&D firms listed by the Industrial R&D Investment Scoreboard (IRI, 2011), as well as the top 100 largest MNEs listed by UNCTAD (2011) can be included under the category of domestic or cross-border BGs
At least 75% (65%) of total US (French) trade can be linked to firms organized as multinational BG
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Why Do Business Groups Exist?
Why BGs organize a number of formally independent firms under a common hierarchy?
In finance BGs are typically explained in terms of some kind of ‘institutional arbitrage’ (e.g. chain control, tax arbitrage, ‘tunnelling’) or ‘portfolio management’ (e.g. risk sharing)
However, it is hard to think of ‘institutional arbitrage’ and ‘portfolio management’ as the main explanations of the pervasiveness of BGs also within countries
Indeed, any fundamental explanation of the existence of BGs should not rely on cross-country asymmetries
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Why Do Business Groups Exist? (Cont.) In economics models of BGs are virtually absent Theories of the (boundaries of the) firm generally
focus on the ‘vertical integration decision’ as a binary choice about sourcing intermediate inputs from within the firm or not (Helpman, 2006)
Some times the ‘relaxed problem’ allowing for non-binary outcomes is used as a technical trick to characterize the binary decision (Antras and Chor, 2013; Alfaro, Antras, Chor and Conconi, 2015) but its not understood as a possible way of modelling BGs
Moreover, in these theories control chains are always related (actually embedded) in supply chains
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Why Do Business Groups Exist? (Cont.)
Alternatively the firm has been modelled as a ‘knowledge-based hierarchy’ (Garicano, 2000; Garicano and Rossi-Hansberg, 2012)
Here the organizational structure depends on the costs of acquiring and communicating knowledge among agents involved with different tasks (‘organization decision’)
Idea: In certain cases BGs are the most efficient means to create and transmit knowledge between linked activities (Altomonte, Garicano, Ottaviano and Rungi, in progress)
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Where We Stand
Input-output relations drive VCs; knowledge creation and transmission drive BGs
Knowledge flows do not necessarily follow Intermediate inputs flows and vice versa
National borders interfere with these flows but cannot explain the pervasiveness of BGs
It is knowledge creation and transmission within BGs that determines growth in the long run
It is ‘brains’ over ‘brawn’ … but our models are mostly ‘brainless’!
